review04 - CHAPTER 4 Financial Reporting and Analysis...

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CHAPTER 4 Financial Reporting and Analysis 0REVIEWING THE CHAPTER Objective 1: Describe the objectives and qualitative characteristics of financial reporting and the ethical responsibilities that financial reporting involves. 10. Financial reporting should fulfill three objectives. It should (a) furnish information that is useful in making investment and credit decisions; (b) provide information that is useful in assessing cash flow prospects; and (c) provide information about business resources, claims to those resources, and changes in them. General-purpose external financial statements are the main way of presenting financial information to interested parties. They consist of the balance sheet, income statement, statement of owner’s equity, and statement of cash flows. 20. Accounting attempts to provide decision makers with information that displays certain qualitative characteristics, or standards:0 a0. Understandability is the qualitative characteristic of information that enables users to perceive its meaning. To understand accounting information, users must be familiar with the accounting conventions, or rules of thumb (discussed in paragraph 4 below), used in preparing financial statements. b0. Another very important standard is usefulness. To be useful, information must be relevant and reliable. Relevance means that the information is capable of influencing a decision. Relevant information provides feedback, helps in making predictions, and is timely. Reliability means that the information accurately reflects what it is meant to reflect, that it is credible, verifiable, and neutral. 30. Users of financial statements depend on a company’s management and accountants to act ethically and with good judgment in preparing the statements. One product of the Sarbanes- Oxley Act is that the chief executive officers and chief financial officers of all publicly traded companies are required to certify that, to their knowledge, the quarterly and annual statements filed with the SEC are accurate and complete. Persons found guilty of fraudulent financial reporting are subject to criminal penalties and fines. Objective 2: Define and describe the conventions of comparability and consistency, materiality, conservatism, full disclosure, and cost-benefit . 40. To help users interpret financial information, accountants depend on five conventions: comparability and consistency, materiality, conservatism, full disclosure, and cost-benefit.0 a0. Comparability means that the information allows the decision maker to compare the same company over two or more accounting periods or different companies over the same accounting period. Consistency means that a particular accounting procedure, once adopted, should not be changed unless management decides it is no longer appropriate or unless reporting requirements change. The nature of the change, its justification, and its dollar effect on income should be disclosed in the notes to the financial statements.
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review04 - CHAPTER 4 Financial Reporting and Analysis...

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